Tax Consequences For Jenny, Sally, And Joseph's Transactions

Answer 1: Tax Consequences for Jenny's Transaction

1. Henry, a tax resident of Australia, was a famous jazz singer who passed away recently. Jack, a publisher was interested on Henry's life story and wanted to write a bibliography on Henry's life. Jack approached Henry's wife, Jenny (also a tax resident of Australia) to interview her on Henry's life story. She was offered $1 million for Henry story. Jenny was paid $500,000 deposit before the interview. After the interview she was paid the balance of the money. Would the tax consequences have changed if Jenny had written the book herself?  Required Advise Jenny on her tax consequences.

2. Sally is a single parent who is employed as an accountant. In order to attend employment she must put her young child in a day-care centre. Sally considers the expense is necessarily incurred in gaining her income. Would she be entitled to a tax deduction under s8-1?

3. Joseph conducts an plumbing business. With a view to future retirement he purchases 20ha of land and plants native wildflowers that he plans to harvest and sell. As a preliminary measure he arranges to clear the land and plough in compost. It is expected that the first commercial crop will not be harvested for five years. He incurs interest on a loan to finance the land purchase, land preparation costs, fertilizer costs and costs of acquiring native seedlings. Advise Joseph of the tax consequences of the venture. You must cite the relevant case law and legislation.

As per the provisions of the section 6 of the ITAA 1936 the income earned by an individual by form of salaries, bonus, fees or any sum that has been received by way of bounty can be considered to constitute a sum that is earned by the taxpayer by personal exertion. As pegrate provision so the section 6-5 most of the income accruing in respect of the taxpayer can be termed as ordinary income. In the present case around MeJenny was receiving million dollars in return of her narrating stories to her husband who passed away recently. Previously she had to pay a sum of $500000 as an advance to the publisher for the purpose of an interview (Anderson et al., 2016).

Any item that is derived by the taxpayer having the character of an income is defined under the provisions FO the section 6-5. Based on the circumstances of the transaction an item having the character of an income is treated. The income that is being received by jeer for the purpose of making herself available for the narration of her story with that of her husband and for the purpose fo lending her name in the stories, that are going to be written by the publisher, will be held assessable as an assessable income as per the provisions which were being made clear in the case of “Brent v Federal Commissioner of Taxation (1971) ATC 4195”. Similar and related provisions of the case of Federal Commissioner of Taxation v Holmes stated out that in the event of receipt of salvage reward payment by the mariners, the same would be held liable as an assessable income (Kennedy et al., 2017).

Answer 2: Tax Consequences for Sally's Transaction

Some of the instances where the amount is received by the taxpayer for the purpose fo services being rendered and still the person is not in employment includes, receipts in case of sponsorship programs that have been received from the commercial firms and receipts that is to be received by the taxpayer in return of appearing in an event. Hence, in the case of Jenny the income received by her for making herself available for the meting constitutes receipts from service but not in employment. As per the provisions of the section 6-5 of the ITAA 1997, the income that is received by Jenny will have to be considered as ordinary income.

The provisions under the Taxation Ruling 2005/01 are related to the conduct of business by a professional artist. There are several distinctive characteristics and the nature of the profession of the art. Based on the various guidelines as issued by the Taxation Raking it is ascertained that whether the person can be considered an artist and he is carrying out a business in the capacity of a professional artist or not.

The relevance of the question asked by Jenny cannot be ignored. The reason for this is that if the story had been written by herself the income that would have been derived by her would have been considered as an income that is earned by her according to the ordinary concepts under the provision fo the section 6-5 of the ITAA 1997 (Woellner et al.,2016). The reason being that the same would have been earned by Jenny in the ordinary course of carrying out the business. For instance, most of the people who are engaged in the procession of arts are motivated by the concept of creativity and the main purpose they hold for their work is to influence the opinion of the public. Hence, if the book had originally been written by Jenny then the income that would have been derived by it could have been held assessable under the provisions of the section 6-5 of the ITAA 1997.

As per the provisions of the section 8-1 of rhea ITAA 1997 deduction are allowed to an individual in respect of all the expenditure that is being incurred by him or the loss that is borne by him up to that extent to which those expenses were incurred for the purpose fo generating the taxable income in his respect or were necessary for the purpose of carrying on the business. However the provisions of the section 8-1(2) prohibits any sort of deduction in respect of the individual if the expenses incurred by him are of capital in nature.

Answer 3: Tax Consequences for Joseph's Transaction

In addition to this the provisionsFO the section 8-1(2) does not allow the individuals any sort of deduction that are private or domestic in nature and had been incurred during the course of giving or accruing an exempted income. as per the facts of the current case Sally being a single parent and employed as an accountant is incurring child care expenditure for the purpose of attending her work (Barkoczy, 2016).

The most significant consideration of the provisions of section 8-1(2) (b) is that in respect of any sort of outgoing or losses that are being incurred by the taxpayer then the same will not be deductible from the assessable income fo the taxpayer. The condition of non-deduction of this expenditure is that either these expenditures are not able to meet the positive limbs or deduction for the same is not allowed under the second negative limbs. As was held in the case of “Lodge vs Federal Commissioner of Taxation” that the expenditure that have been incurred for the purpose of childcare expenditure. It would not be allowed as deduction at any cost (Matthew 2015). The reason being that the expenditures in respect of the child care is not incidental to the business and also not incurred in any way for the purpose fo granting table income. Hence, deduction for the same will not be available (Ali et al., 2017).

As per the provisions of the section 51 (1) the tax payer is allowed to claim deduction in respect of expenditure that have been incurred for the purpose of generating of taxable income except in cases where the same art of private or domestic in nature. Hence, accordingly in the case of Sally the expenditure incurred by her in respect of the childcare shall not be allowed as deductions. The reason for this is that the childcareexpenditure is not considered as significant and the same is not incurred for generating taxable income for the taxpayer. Hence, the provisions of the section 8-1 of the income tax assessment act 1997 prohibitany sort of deduction in its respect.

The provisions or the guidelines as stated in the taxation ruling 97/11 provide details regarding what constitutes business of primary production. The ruling lays down several guidelines to determine whether the business carried out by the person constitutes a business of primary production. The process of carrying out the production and the propagationFO the plants or the products that are being obtained from them in a physical environment. Thought I tis recognised that each of the situation  is unique and the matters are to be considered on a case specific manner to determine the nature of the production carried out by the taxpayer, the raking tries to lay down certain guidelines that could be made applicable on majority of the cases. For the determination of the facts of the venture, the Paragraph 25 of the TR97/11 lays down the several guidelines (McGregor-Lowndes 2016). The guidelines or the rulings include the determination of whether the activity that is being carried on by the entity had the characteristics of the business or was carried out for the purpose of commerce. In addition, it is also to be determined whether the taxpayer himself intends to earn profit apart from the profit from the venture.

As per the facts of the present case, keeping in mind the plan of his future retirement had indulged in purchase of a land and commenced the farming of wild flowers, which is intended by him for the purpose of harvesting and selling in the market. As per the guidelines given out in the paragraph 14 of the Taxation Ruling of the TRY98/17, states that it is not required on the part of the taxpayer to derive most of the income out of the primary production. It is fully possible for the taxpayer to stay employed elsewhere or to carry out profession elsewhere. However, one FO the most important factors is that whether the activities concerned with the carrying out of the primary production amount to business or not. As per the decisionsgiven out in the case law “Evans v Federal Commissioner of Taxation (1953)”. Held that it has to be determined that as perceived by the general view is that whether the activities that are being performed are in the nature of commerce?

The court in the case of “Ferguson v Federal commissioner of Taxation (1979)ATC 4261” held that there are many factors to be ascertained and observed. Some of these factors include the nature of the activity, the intention of the taxpayer behind carrying out these operations and along with it, the mode of operation plays a significant role in determining whether the business of primary production is being carried on. The purpose of the activities must be profit making and the way of organisation FO the activities is a well-served indication that Joseph is engaged in the process of carrying out business. As per the observations being made, it can be concluded that in case the taxpayer is earning revenue or is having some sort of regular income like that of salaries, is also engaged in some primary production.

In the present case, too it is found that there is significant amount of commercial purpose involved. The scale of the venture that was being carried out by Joseph was big enough and it made sure that the venture becomes profitable (Berg, C., & Davidson, 2017). Even though the process of generation the income would have taken five years, it was clear that revenue generation by way of conducting commercial activities would be engaged in by the taxpayers. The activities involving the plantation of the wild flowers had every characteristics of a business. It was clearly established that Joseph planted and harvested the wild flowers for commercial purposes.

Hence it can be said that the profits that are going to be generated by Joseph from such activities will be liable for taxation as per the provisions FO the section 6-5 of the ITAA 1997 as a means of proceeds from business. For claiming deduction, Joseph can state items such as interest on loan, costs incurred in respect of fertilizers, and the cost involved in the process of native seeding. The reason being that the expenses are incurred for running the business and the same are directly related to the generation of income.

Reference List:

Ali, M., Sales, A. B. I. C. L., Barwick, J., Digirolamo, L., Australia, C. R., Officer, D. R., ... & Khalid, A. (2017). School of Business.

Anderson, C., Dickfos, J., & Brown, C. (2016). The Australian Taxation Office-what role does it play in anti-phoenix activity?. Insolvency Law Journal, 24(2), 127-140.

Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.

Berg, C., & Davidson, S. (2017). " Stop this greed": The tax-avoidance political campaign in the OECD and Australia. Econ Journal Watch, 14(1), 77.

Kennedy, T., Smyth, R., Valadkhani, A., & Chen, G. (2017). Does income inequality hinder economic growth? New evidence using Australian taxation statistics. Economic Modelling, 65, 119-128.

Matthew, A. F. (2015). Regulating against corporate phoenix activity.

McGregor-Lowndes, M. (2016). Lawyers, reform and regulation in the Australian third sector. Third Sector Review, 22(2), 33.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. OUP Catalogue.